The Effect of Tax Haven Utilization on the Implied Cost of Equity Capital : Evidence from U.S. Multinational Firms

Grantley Tayler Grant Richardson Ahmed Al-Hadi and Ivan Obaydin. Abstract: This study examines the effect of tax haven utilization on the implied cost of equity capital (ICOE) based on a sample of publicly-listed U.S. multinational firms over the 2006–2014 period. Our regression results show that tax haven utilization is significantly positively associated with the ICOE. In terms of economic significance, we find that, on average, a one-standard deviation increase in tax haven utilization leads to an increase in the ICOE for our sample firms by approximately 0.30% or 30 basis points. We also observe that our baseline regression results are robust to a number of endogeneity checks. In additional analysis, we find that high operating cash flows and independent director monitoring are likely to moderate the positive association between tax haven utilization and the ICOE, while high agency costs magnify this association. Overall, this study provides unique insights into the the effect of tax haven utilization on the ICOE